ARGAN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)
The following discussion summarizes the financial position of Argan, Inc. and its subsidiaries as of April 30, 2016, and the results of their operations for the three months ended April 30, 2016 and 2015, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2016 that was filed with the Securities and Exchange Commission on April 15, 2016.Cautionary Statement Regarding Forward Looking StatementsThe Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. We have made statements in this Item 2 and elsewhere in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could,” or other similar expressions are intended to identify forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements, by their nature, involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors including, but not limited to, the risks and uncertainties described in Item 1A of Part II of this Quarterly Report on Form 10-Q and Item 1A of Part I of our Annual Report on Form 10-K for the year ended January 31, 2016. Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Argan, Inc. is a holding company that conducts operations through its wholly-owned subsidiaries, GPS, APC, SMC and TRC. Through GPS and APC, we provide a full range of engineering, procurement, construction, commissioning, operations management, maintenance, development, technical and consulting services to the power generation and renewable energy markets for a wide range of customers including independent power project owners, public utilities, power plant equipment suppliers and global energy plant construction firms. GPS, including its consolidated joint ventures and variable interest entities (see Note 3), and APC represent our power industry services reportable segment. Through TRC, the industrial fabrication and field services reportable segment produces, delivers and installs fabricated steel components specializing in piping, pressure vessels and heat exchangers for industrial plants primarily located in the southern United States. In addition, TRC includes a plant services group that handles maintenance turnarounds, shutdowns and emergency mobilizations. Through SMC, the telecommunications infrastructure services segment provides project management, construction, installation and maintenance services to commercial, local government and federal government customers primarily in the mid-Atlantic region.At the holding company level, we intend to make additional acquisitions and/or investments by identifying companies with significant potential for profitable growth. We may have more than one industrial focus. We expect that companies acquired in each of these industrial groups will be held in separate subsidiaries that will be operated in a manner that best provides cash flows and value for our stockholders.
For the three months ended April 30, 2016 (the first quarter of our fiscal year 2017), consolidated revenues increased by $44.8 million, or 52%, to $130.3 million for the current quarter compared with consolidated revenues of $85.5 million for the first quarter of last year, due primarily to the increased revenues of our power industry services business. The revenues of this group rose by $25.2 million for the first quarter of the current year to $108.1 million compared with $82.9 million for the three months ended April 30, 2015. In addition, our current quarter results include the operating results of TRC, which contributed revenues of $20.4 million for the period.
——————————————————————————–Table of ContentsThe ramp-up of construction activity on five new large gas-fired power plant projects and the results for TRC and APC pushed our total gross profit for the current quarter to $28.3 million compared with gross profit in the amount of $21.2 million earned during the three months ended April 30, 2015. As anticipated by us, our overall gross profit percentage, expressed as a percentage of the corresponding consolidated revenues for the applicable period, decreased for the current quarter to 21.7% compared with a percentage of 24.8% for last year’s first quarter. The current quarter mix of revenues included results related to the five new power-plant projects and the newly acquired companies, TRC and APC, all of which contributed gross profits at lower percentages of corresponding revenues than the operations of last year’s first quarter. With the addition of the new companies, the amount of our selling, general and administrative expenses increased to $7.0 million for the current quarter compared with $5.5 million for the first quarter last year. However, these expenses, expressed as a percentage of corresponding revenues, declined to 5.4% for the current quarter compared with a percentage of 6.5% last year.Net income attributable to our stockholders for the three months ended April 30, 2016 increased by 63% to $12.2 million, or $0.81 per diluted share, compared with net income attributable to our stockholders of $7.5 million, or $0.50 per diluted share, for the three months ended April 30, 2015. A declining share of our operations was performed by our construction joint ventures during the current quarter. As a result, the amount of net income attributable to noncontrolling interests was $1.9 million for the current quarter; the comparable amount for the three-month period ended April 30, 2015 was $3.3 million.As typically happens with new projects, the early stages of the new power-plant projects provided a temporary increase in the total amount of billings in excess of corresponding project costs and estimated earnings providing cash in the amount of $28.8 million for the current quarter. In addition, the net income for the current quarter, adjusted for noncash expenses, provided cash in the total amount of $17.3 million. Primarily due to these favorable effects, the net amount of cash provided by our operating activities for the current quarter was $43.7 million, more than offsetting our use of cash to increase the level of short-term investing in certificates of deposit by $14.0 million during the current quarter. For the current quarter in total, the balance of our cash and cash equivalents increased by $30.5 million to $191.4 million as of April 30, 2016. During last year’s first quarter, the balance of our cash and cash equivalents declined by $59.2 million.
Panda Power Plant Projects
Since 2013, we have performed engineering, procurement and construction (“EPC”) services for two natural gas-fired power plants, known as Panda Liberty and Panda Patriot. The EPC contracts were assigned to two separate joint ventures that were formed in order to perform the work for the applicable project and to spread the bonding risk of each project. The joint venture partner for both projects is a large, heavy civil contracting firm. We have no significant commitments under these arrangements beyond those related to the completion of the EPC contracts. The joint venture partners are dedicating resources that are necessary to complete the projects and are being reimbursed for their costs. We are performing most of the activities of these two EPC contracts.For the three months ended April 30, 2016 and 2015, we recognized revenues associated with EPC contract services provided to Panda Liberty and Panda Patriot that combined represented approximately 26% and 93% of consolidated revenues, respectively. These two projects are scheduled for completion in calendar year 2016. In late April 2016, we achieved substantial completion on the Panda Liberty project.The corresponding joint venture agreements, as amended, provide that we have the majority interest in any profits, losses, assets and liabilities that may result from the performance of the EPC contracts. Due to our financial control of the joint ventures, their accounts have been included in our condensed consolidated financial statements since the commencement of activities under the EPC contracts near the end of the fiscal year ended January 31, 2015.
Contract backlog represents the total accumulated value of projects awarded less the amounts of revenues recognized to date on those contracts at a specific point in time. We believe contract backlog is an indicator of future revenues and earnings potential. Although contract backlog reflects business that we consider to be firm, cancellations or reductions may occur and may reduce contract backlog and our expected future revenues. At April 30, 2016, our total contract backlog was approximately $1.5 billion. Our total contract backlog as of January 31, 2016 and April 30, 2015 was approximately $1.1 billion and $347 million, respectively.
——————————————————————————–Table of ContentsThe following table summarizes our current large EPC power plant projects:
Size of Date FNTP Scheduled
Current Project Location Facility Received(1) Completion
Panda Liberty Power Project Pennsylvania 829 MW August 2013 2016
Panda Patriot Power Project Pennsylvania 829 MW December 2013 2016
Caithness Moxie Freedom Pennsylvania 1,040 MW November 2015 2018
CPV Towantic Energy Center Connecticut 785 MW March 2016 2018
NTE Middletown Energy Center Ohio 475 MW October 2015 2018
NTE Kings Mountain Energy North Carolina 475 MW March 2016 2018
Exelon West Medway II Massachusetts 200 MW (2) (2)
——————————————————————————–(1) Full Notice to Proceed (“FNTP”) represents the formal notice provided by the project owner instructing us to commence the activities covered by the corresponding EPC contract without limitation.(2) The FNTP for this project is subject to Massachusetts regulatory approvals, and the scheduled completion date is yet to be determined.Acquisition of The Roberts CompanyOn December 4, 2015, we acquired The Roberts Company (“TRC”), which was founded in 1977 and is headquartered near Greenville, North Carolina. TRC is principally an industrial fabricator and constructor serving both light and heavy industrial organizations primarily in the southern United States. We paid $0.5 million to acquire the member interests of TRC, and assumed approximately $16 million in debt obligations, which we paid off on the acquisition date. TRC continues to operate under its own name with its own management team. Historically, TRC has been primarily a profitable company that incurred a net loss in 2015 up to the date of its acquisition by us, primarily due to it taking on large contracts that resulted in significant losses. With the reengagement and leadership of TRC’s founder, John Roberts, our financial support and the substantial completion of these loss contracts, we acquired TRC with the belief that it is positioned to succeed in the future with a return to profitable operations. However, there can be no assurances that TRC will succeed in the future or will resume sustained profitability. Since the acquisition, we have advanced an additional $22.5 million in cash to TRC in order to fund the completion of the work on the loss contracts, to enhance working capital and for other general corporate purposes. Currently, TRC operates as its own reportable business segment, Industrial Fabrication and Field Services.Our condensed consolidated statements of earnings and cash flows for the three months ended April 30, 2016 include the operating results of TRC, and the balance sheet amounts of TRC are included in our condensed consolidated balance sheets as of April 30 and January 31, 2016.Acquisition of Atlantic Projects Company LimitedOn May 29, 2015, we acquired Atlantic Projects Company Limited, a private company incorporated in the Republic of Ireland, and its affiliated companies (together “APC”). Formed in Dublin over forty years ago, APC provides turbine, boiler and large rotating equipment installation, commissioning and outage services to original equipment manufacturers, global construction firms and plant owners worldwide. APC has successfully completed projects in more than thirty countries on six continents. With its presence in Ireland and its other offices located in Hong Kong, Singapore and New York, APC expands our operations internationally for the first time. APC operates under its own name and with its own management team as a member of our group of companies. The fair value of the consideration transferred to the former owners of APC was approximately $11.1 million.Our condensed consolidated statements of earnings and cash flows for the three months ended April 30, 2016 include the operating results of APC, and the balance sheet amounts of APC are included in our condensed consolidated balance sheets as of April 30 and January 31, 2016.
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The power industry has not fully recovered from the recessionary decline in the demand for power in the United States. Total electric power generation from all sources has decreased slightly for three of the last four years, including a 0.2% decline in 2015. For calendar year 2015, the total amount of electricity generated in the United States was approximately 98% of the peak power generation level of 2007. Recently published government forecasts project an annual increase in power generation of approximately 0.8% per year for the next 25 years.For calendar year 2015, electricity generated in the United States by natural gas-fired power plants comprised 32.7% of total generation, which reflected an 18.5% annual increase in the number of megawatt hours provided by these plants as the amount of natural gas used for power generation during calendar year 2015 reached an all-time high. The comparable increase for 2014 versus 2013 was approximately 1%. Electricity generation provided by coal-fired power plants in 2015 represented 33.2% of total generation compared with a share percentage of 38.6% for 2014. The number of megawatt hours provided by coal-fired plants declined by 14.3% in 2015 compared to the amount provided in 2014. For the third and fourth quarters of calendar 2015, the shares of total electrical power generated by natural gas-fired plants actually exceeded the shares provided by coal-fired power plants, the first two times that this has occurred. For 2016, the shares of total electricity generation provided by gas-fired power plants and coal-fired power plants are expected to be approximately 33.4% and 32.0%, respectively, meaning that natural gas will overtake coal as the leading source of power generation in the United States.The electricity-generation statistics for 2015 are consistent with the long-term power generation trends. Over the last 10 years, total power generation has increased by less than 1% and coal has remained the largest energy source for electricity generation. However, during this period, the amount of electricity generated by natural gas-fired power sources increased by 75%, and the amount of electric power generated by coal-fired plants declined by 33%. The amount of electricity provided by nuclear power plants increased over the last 10 years by only 2%. Electrical power generated by renewable energy sources (excluding hydroelectric sources) more than tripled over the last ten years, but represents only 7% of total generation.Current projections of future power generation assume the sustained increase in domestic natural gas production, which should lead to stable natural gas prices continuing into the future. The availability of competitively priced natural gas, the significant increases in the efficiency of combined cycle power plants, the existence of certain programs encouraging renewable fuel use, and the implementation of a series of environmental rules, primarily directed toward the reductions of air pollution and the emissions of greenhouse gases should dampen future coal use and continue to increase the shares of the power generation mix represented by gas-fired power plants, wind farms, solar fields and other renewable energy sources.Announcements by electric utilities of the retirement of coal-fired and nuclear power plants continue, citing the availability of cheap natural gas, increasingly stringent environmental regulations and the significant costs of refurbishment and relicensing. The future retirements of coal and nuclear plants will result in the need for new capacity, and new natural gas-fired plants are cheaper to build than coal, nuclear, or renewable plants, they are substantially more environmentally friendly than conventional coal-fired power plants, and they represent the most economical way to meet peak demands.The expected increase in momentum towards more environmentally friendly power generation facilities has not occurred at the pace generally expected prior to the latest recession. The Environmental Protection Agency has been stridently exercising an expansion of regulatory power over air quality and electric power generation. However, the federal government has not passed comprehensive energy legislation that might include national renewable energy standards, incentives or mandates for the retirement of existing coal-fired power plants and caps on the volume of carbon emissions. Existing coal-fired plants in the United States are proving to be a challenge to retrofit or replace. Coal prices are widely considered to be stable and certain states see the availability of inexpensive, coal-powered electricity as a key driver of economic growth. Additional uncertainty was created when, in February 2016, the United States Supreme Court decided to stay the implementation of the agency’s Clean Power Plan, which was finalized in August 2015, as it undergoes legal review. As a result, the requirement for states to draft compliance plans by September 2016 has been at least delayed, and states have longer periods of time in order to consider and make decisions regarding future power generation mixes. The future pace of announcements of coal-fired power plant retirements may slow.
——————————————————————————–Table of ContentsNevertheless, as we have stated in the past, we believe that the long-term prospects for natural gas-fired power plant construction are favorable. Major advances in horizontal drilling and the practice of hydraulic fracturing have led to a boom in natural gas supply. The abundant availability of cheap, less carbon-intense, natural gas should continue to be a significant factor in the economic assessment of future power plants. Currently effective emission standards have also become a significant obstacle for any plan to build a new coal-fired power plant. Despite the recent success in the Supreme Court, the coal industry fears that the pending regulations limiting carbon emissions may jeopardize the continuing operation of existing coal-fired power plants. The future of clean burning coal-fired power plants is also uncertain. For multiple reasons, the retrofit of existing coal-fired plants in order to employ carbon-capture and sequestration processes (“CCS”) is problematic. Construction costs and schedules for new CCS plants are proving to be difficult to control, and these projects may be difficult to finance. A power industry trade publication predicted in 2015 that only three large scale, coal-fired CCS power plants will be operating in North America by 2020.As indicated above, the demand for electric power in this country is expected to grow slowly but steadily over the long term. Increasing demands for electricity, the ample supply of natural gas, and the expected retirement of old coal, nuclear and oil-powered energy plants, should result in natural gas-fired and renewable energy plants, like wind, biomass and solar, representing the substantial majority of new power generation additions in the future and an increased share of the power generation mix. Currently, the business environment in our sector has improved substantially due to a combination of an overall improved economy and the forward momentum of increasing the amount of electrical power generated in the United States from energy resources other than coal. Market concerns about emissions should continue to dampen the expansion of coal-fired capacity. Low fuel prices for new natural gas-fired plants also affect the relative economics of coal-fired capacity, as does the continued rise in construction costs for coal-fired power plants incorporating new carbon-capture techniques. We expect continuing concerns about the safety, high cost and construction cost overrun risk of nuclear power plants. In summary, the development of renewable and natural gas-fired power generation facilities should result in new construction opportunities for us.During the construction industry’s recovery from the recession, we have been successful in the effective and efficient completion of our EPC projects and the control of costs while we pursue new construction business opportunities. Despite the intensely competitive business environment, we are committed to the rational pursuit of new construction projects which may result in our decision to make investments in the ownership of new projects, at least during the corresponding development phase. Because we believe in the strength of our balance sheet, we are willing to consider certain opportunities that include reasonable and manageable risks in order to assure the award of the related EPC contract to us.Accordingly, our involvement with the development of projects sponsored by Moxie and others began after careful evaluation of the opportunities and risks. We structured the terms of our involvement with each of these projects in order to minimize the financial risks and to benefit from the successful development of the projects.With a growing reputation as a low cost provider of EPC contracting services and with the proven ability to deliver completed power facilities, particularly combined-cycle, gas-fired power plants, we are focused on expanding our position in the growing power markets where we expect investments to be made based on forecasts of increasing electricity demand covering decades into the future. Moreover, we believe that the EPC contract approach preferred by us, once considered an alternative delivery method for power plant construction, is now an accepted industry practice in the United States as a strategy that gives project owners an end-to-end solution by putting nearly all aspects and phases of a project under a single contract.We believe that our expectations are reasonable and that our future plans are based on reasonable assumptions. Our performance on current projects, including the five latest EPC projects awarded to us, should provide a stable base of business activity for the next few fiscal years. We are looking forward to ramping up activities on the new projects, to continuing efficient performance on current projects and to being able to take advantage of new opportunities that should continue to emerge in the improving business environment.Comparison of the Results of Operations for the Three Months Ended April 30, 2016 and 2015We reported net income attributable to our stockholders of $12.2 million, or $0.81 per diluted share, for the three months ended April 30, 2016. For the three months ended April 30, 2015, we reported a comparable net income amount of $7.5 million, or $0.50 per diluted share.
——————————————————————————–Table of ContentsThe following schedule compares our operating results for the three months ended April 30, 2016 and 2015 (dollars in thousands).
Three Months Ended April 30,
2016 2015 $ Change % Change
Power industry services $ 108,099$ 82,884$ 25,215 30.4 %
Industrial fabrication and field
services 20,410 – 20,410 NM
infrastructure services 1,839 2,604 (765 ) (29.4 )
Revenues 130,348 85,488 44,860 52.5
COST OF REVENUES
Power industry services 83,698 62,379 21,319 34.2
Industrial fabrication and field
services 16,988 – 16,988 NM
infrastructure services 1,360 1,942 (582 ) (30.0 )
Cost of revenues 102,046 64,321 37,725 58.7
GROSS PROFIT 28,302 21,167 7,135 33.7
Selling, general and
administrative expenses 7,047 5,540 1,507 27.2
INCOME FROM OPERATIONS 21,255 15,627 5,628 36.0
Other income, net 37 85 (48 ) (56.5 )
INCOME BEFORE INCOME TAXES 21,292 15,712 5,580 35.5
Income tax expense 7,172 4,861 2,311 47.5
NET INCOME 14,120 10,851 3,269 30.1
Net income attributable to
noncontrolling interests 1,890 3,348 (1,458 ) (43.5 )
NET INCOME ATTRIBUTABLE TO THE
STOCKHOLDERS OF ARGAN, INC. $ 12,230$ 7,503$ 4,727 63.0 %
NM = Not Meaningful
Power Industry Services
The revenues of the power industry services business increased by $25.2 million to $108.1 million for the three months ended April 30, 2016 compared with revenues of $82.9 million for the three months ended April 30, 2015. The revenues of this business represented approximately 83% of consolidated revenues for the current quarter, and approximately 97% of consolidated revenues for the prior year. The current quarter increase in revenues for the power industry services segment reflected the initial activities of the five new EPC contracts, which represented approximately 53% of consolidated revenues for the current period, and the continued, but declining, construction activity of the two Panda Power Plant Projects which represented 26% of consolidated revenues for the current quarter. Last year, the combined revenues associated with these two gas-fired power plant projects represented approximately 93% of consolidated revenues for the first quarter. Last year’s first quarter results also included revenues in the amount of $1.6 million that were recorded in connection with the resolution of the Altra bankruptcy matter discussed in Note 10 to the accompanying condensed consolidated financial statements.Future revenues associated with the two Panda Power Plant Projects are expected to decline as the projects progress toward their completion in calendar 2016. However, these decreases should be more than offset by revenues earned on the construction activities associated with new projects and increased revenues contributed by APC.Industrial Fabrication and Field ServicesThe revenues for this segment reflect the first full quarter of activity as we acquired TRC on December 4, 2015. TRC’s major customers include some of North America’s largest forest products companies, such as Weyerhauser, Resolute, Domtar and Georgia Pacific, and large crop nutrient processors. During the quarter ending July 31, 2016, TRC expects to complete its contracts that caused the large pre-acquisition losses and intends to focus on growing contract backlog with the addition of new, profitable projects.
——————————————————————————–Table of ContentsTelecommunications Infrastructure ServicesThe revenues of this reportable business segment decreased by approximately 29% for the current quarter compared with the corresponding period last year. For the three months ended April 30, 2016, approximately 61% of SMC’s revenues were derived from outside plant services provided pursuant to several new projects.
Cost of Revenues
Due primarily to the increase in consolidated revenues for the three months ended April 30, 2016 compared with last year’s first quarter, the corresponding consolidated cost of revenues also increased. These costs were $102.0 million and $64.3 million for the three months ended April 30, 2016 and 2015, respectively, with the increase associated primarily with new EPC contracts and the addition of the costs of revenues for APC and TRC. Our overall gross profit percentage of 21.7% of consolidated revenues was lower in the current quarter compared to a percentage of 24.8% for the first quarter last year due to the new business of GPS and the addition of APC and TRC. Also, the gross profit reported for last year’s first quarter included the 100% gross profit contribution of $1.6 million provided by the resolution of the Altra matter.Selling, General and Administrative ExpensesThese costs were $7.0 million and $5.5 million for the three months ended April 30, 2016 and 2015, respectively, representing approximately 5.4% and 6.5% of consolidated revenues for the corresponding periods, respectively. The increase of $1.5 million reflected the addition of the selling, general and administrative costs for APC and TRC which were $2.3 million combined for the current quarter. Partially offsetting these factors was a reduction in costs at GPS as an increased amount of staff costs were absorbed in the direct costs of the new projects. In addition, the costs for last year’s first quarter included professional fees associated primarily with the preparation of legal documents and the performance of due diligence activities related to the acquisition of APC.
Income Tax Expense
For the three months ended April 30, 2016, we recorded income tax expense of $7.2 million reflecting an estimated annual effective income tax rate of approximately 34.1%. This rate differed from the expected federal income tax rate of 35% due primarily to the favorable permanent effects of the domestic production activities deduction and the exclusion of income attributable to our joint venture partner from our taxable income, offset substantially by the unfavorable effect of state income taxes. As the joint ventures are treated as partnerships for income tax reporting purposes, we report only our share of the taxable income of the entities.For the three months ended April 30, 2015, we recorded income tax expense of $4.9 million reflecting an annual effective income tax rate estimated to be approximately 30.9% at the time. This rate differed from the expected federal income tax rate of 35% due primarily to the favorable permanent effect of excluding the income attributable to our joint venture partner (which was more significant last year) from our taxable income. Our effective tax rate also reflected the permanent benefit of the domestic production activities deduction. These factors were partially offset by the unfavorable effects of state income taxes. Our actual annual effective income tax rate for the year ended January 31, 2016 was 33.5%.Liquidity and Capital Resources as of April 30, 2016During the three months ended April 30, 2016, our combined balance of cash and cash equivalents increased by $30.5 million to $191.4 million as of April 30, 2016 from a balance of $160.9 million as of January 31, 2016. During this same period, our working capital increased by $18.8 million to $182.8 million as of April 30, 2016 from $164.0 million as of January 31, 2016.During the current quarter, we experienced a net increase of $28.8 million in the amount of billings on current projects that temporarily exceeds the corresponding amounts of costs and estimated earnings, which primarily reflected the early-stage activities of GPS on its new EPC contracts. This increase more than offset the decline in such balances for the Panda Liberty and Panda Patriot power plant projects as work on these jobs approaches completion. The increasing retainages associated with new work pushed accounts receivable up by $6.7 million during the current quarter, which represented a use of cash.
——————————————————————————–Table of ContentsNet income for the current quarter, including the favorable adjustments related to noncash expense items, provided cash in the total amount of $17.3 million.Primarily due to these factors, the net amount of cash provided by operating activities for the current quarter was $43.7 million. Our primary use of this cash during the current quarter was the net purchase of short-term investments (bank CDs) in the amount of $14.0 million.During the three months ended April 30, 2015, we made short-term investments totaling $56.0 million. Primarily due to this use of cash, our balance of cash and cash equivalents decreased by approximately $59.2 million to $274.5 million from a balance of $333.7 million as of January 31, 2015. Conversely, our working capital increased by $10.7 million to $159.6 million as of April 30, 2015 from $148.9 million as of January 31, 2015.Net cash was used in our operating activities during the three months ended April 30, 2015 in the amount of $2.3 million despite our net income for the quarter in the amount of $10.9 million. However, expected changes in the balances of our current operating accounts represented an aggregate use of cash during last year’s first quarter in the net amount of $13.9 million.Last year, we renegotiated our financing arrangements with Bank of America (the “Bank”); the replacement agreement was completed in August 2015. It provides a revolving loan with a maximum borrowing amount of $10.0 million that is available until May 31, 2018 with interest at LIBOR plus 2.00%. We may also use the borrowing ability to cover standby letters of credit issued by the Bank to us in the ordinary course of business. There were no actual borrowings outstanding under Bank financing arrangements as of April 30, 2016 or January 31, 2016. Borrowing availability in the total amount of approximately $4.4 million has been designated to cover several letters of credit issued by the Bank, with expiration dates ranging from September 23, 2016 to January 8, 2017, to cover insurance exposures and in support of the project development activities of a potential power plant owner, leaving approximately $5.6 million available for use currently.The Company has pledged the majority of its assets to secure the financing arrangements. However, the Bank’s consent is not required for acquisitions, divestitures, cash dividends or significant investments as long as certain conditions are met. The Bank requires that we comply with certain financial covenants at our fiscal year-end and at each of our fiscal quarter-ends. We were in compliance with theses financial covenants as of April 30, 2016. Management believes that the Company will continue to comply with its financial covenants under the replacement financing arrangements.If the Company’s performance results in our noncompliance with any of the financial covenants, we would most likely seek to modify the financing arrangements, but there can be no assurance that the Bank would not exercise its rights and remedies under the financing arrangements including accelerating the payment of all then outstanding senior debt due and payable.In addition, the commercial bank that has supported the activities of TRC issued two outstanding irrevocable letters of credit on its behalf in the amounts of $0.5 million and $0.4 million with current expiration dates of June 30, 2016 and August 31, 2016, respectively, which are secured by a lien on the owned facility of TRC.At April 30, 2016, most of our balance of cash and cash equivalents was invested in a high-quality money market fund with at least 80% of its net assets invested in U.S.Treasury obligations and repurchase agreements secured by U.S.Treasury obligations. Our domestic operating bank accounts are maintained with the Bank. The Company does maintain certain Euro-based bank accounts in the Republic of Ireland in support of the operations of APC.We believe that cash on hand, cash that will be provided over the next six months with the maturities of short-term investments and cash generated from our future operations, with or without funds available under our line of credit, will be adequate to meet our general business needs in the foreseeable future. Any future acquisitions, or other significant unplanned cost or cash requirement, may require us to raise additional funds through the issuance of debt and/or equity securities. There can be no assurance that such financing will be available on terms acceptable to us, or at all. If additional funds are raised by issuing equity securities, significant dilution to the existing stockholders may result.
——————————————————————————–Table of ContentsEarnings before Interest, Taxes, Depreciation and Amortization (Non-GAAP Measurement)The following table presents the determinations of Earnings before Interest, Taxes, Depreciation and Amortization (“EBITDA”) for the three months ended April 30, 2016 and 2015 ($s in thousands):
Net income, as reported $ 14,120$ 10,851
Interest expense – 44
Income tax expense 7,172 4,861
Depreciation 434 119
Amortization of purchased intangible assets 321 60
EBITDA 22,047 15,935
Noncontrolling interests –
Net income 1,890 3,348
Interest expense – 112
Income tax benefit – (42 )
EBITDA of noncontrolling interests 1,890 3,418
EBITDA attributable to the stockholders of Argan, Inc.$ 20,157$ 12,517We believe that EBITDA is a meaningful presentation that enables us to assess and compare our operating cash flow performance on a consistent basis by removing from our operating results the impacts of our capital structure, the effects of the accounting methods used to compute depreciation and amortization and the effects of operating in different income tax jurisdictions. Further, we believe that EBITDA is widely used by investors and analysts as a measure of performance.As EBITDA is not a measure of performance calculated in accordance with generally accepted accounting principles in the United States (“US GAAP”), we do not believe that this measure should be considered in isolation from, or as a substitute for, the results of our operations presented in accordance with US GAAP that are included in our condensed consolidated financial statements. In addition, our EBITDA does not necessarily represent funds available for discretionary use and is not necessarily a measure of our ability to fund our cash needs.As we believe that our net cash flow provided by or used in operations is the most directly comparable performance measure determined in accordance with US GAAP, the following table reconciles the amounts of EBITDA for the applicable periods, as presented above, to the corresponding amounts of net cash flows provided by or used in operating activities that are presented in our condensed consolidated statements of cash flows for the three months ended April 30, 2016 and 2015:
EBITDA $ 22,047$ 15,935
Current income tax expense (5,275 ) (4,990 )
Stock option compensation expense 659 520
Other noncash items (128 ) 203
Interest expense – (44 )
Increase in accounts receivable (6,713 ) (7,170 )
Increase in prepaid expenses/other assets (1,408 ) (3,424 )
Increase (decrease) in accounts payable and accrued expenses 5,786 (4,729 ) Changes related to the timing of scheduled billings 28,758 1,409
Net cash provided by (used in) operating activities $ 43,726$ (2,290 )
Critical Accounting Policies
We consider the accounting policies related to revenue recognition on long-term construction contracts; the accounting for business combinations, the subsequent valuation of goodwill, other indefinite-lived assets and long-lived assets; the valuation of employee stock options; income tax reporting and the financial reporting associated with any legal matters to be most critical to the understanding of our financial position and results of operations, as well as the accounting and reporting for special interest entities including joint ventures and variable interest entities. Critical accounting policies are those related to the areas where we have made what we consider to be particularly subjective or complex judgments in making estimates and where these estimates can significantly impact our financial results under different assumptions and conditions. These
——————————————————————————–Table of Contentsestimates, judgments, and assumptions affect the reported amounts of assets, liabilities and equity and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting periods. We base our estimates on historical experience and various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets, liabilities and equity that are not readily apparent from other sources. Actual results and outcomes could differ from these estimates and assumptions.An expanded discussion of our critical accounting policies is included in Item 7 of Part II of our Annual Report on Form 10-K for the year ended January 31, 2016. During the three-month period ended April 30, 2016, there have been no material changes in the way we apply the critical accounting policies described therein.Recently Issued Accounting Pronouncements© Edgar Online, source Glimpses